Prospects for agricultural markets and income 2004 - 2011 for EU-25 - By the European Commission - The Directorate-General for Agriculture and Rural Development of the European Commission has published in recent years an overview of market trends and mediumterm projections of supply and demand for the main agricultural commodities. This publication provides a picture of the likely developments of agricultural markets up to 2011, based on a certain number of assumptions and on the statistical information available in October 2004.

Foreword

This report contains three chapters. The first chapter centres on the market and income prospects by the year 2011 within the EU and covers the following products: cereals, oilseeds, meat, milk and the main dairy products. Chapter II is dedicated to the impact of the 2004 EU enlargement and compares the medium-term perspectives for individual new Member States against a hypothetical counterfactual scenario without enlargement. Finally, a presentation of the medium and long-term prospects of agricultural world markets, based on reports and projections established by various international organisations and institutes, is given in chapter III.

Executive Summary: Projections for the EU-25

Market projections for the main agricultural products in the EU-25 were established under a specific set of assumptions. These cover the outlook for the macro-economic environment, with a recovery of EU economic growth and a strengthening of the US$ over the medium-term. World agricultural commodity markets are assumed to show growing demand and trade. Trade policies are assumed to be governed by the Uruguay Round Agreement on Agriculture and no new multilateral trade agreement has been accounted for. All existing trade commitments are assumed to be met.

In 2003 cereal production dropped to 230 mio t from 263 mio t in 2002 owing to exceptional weather conditions. Lower mandatory set-aside combined with more favourable climatic conditions led to a sharp rebound in 2004 as total cereal harvest is estimated to have reached 279 mio t, with 61 mio t produced in the new Member States. The medium term perspectives for the cereal markets appear moderately positive thanks to the impact of the CAP reform and the return to higher set-aside levels which, combined with more favourable world market conditions should contribute to an improvement of the balance of cereal markets over the medium term. This development would be conditional on an improvement of the exchange rate environment. Specific difficulties could arise for coarse grains, in particular for barley, and on a regional scope for soft wheat and maize. After a rapid decline in the first part of the projection period, cereal stocks would moderately build up leaving domestic prices under less pressure than in the short-term.

Market perspectives for the EU oilseed sector are foreseen to be supported by productivity increases and favourable conditions on world markets. Despite the projected moderate increase in oilseed production, the EU will continue to remain a large net importer of oilseeds. These perspectives remain conditional on the implementation of the biofuel directive in the Member States.

The EU meat sector came back to a more normal situation after the extreme market conditions of the past few years, when it was hit by the second BSE scare and the FMD outbreak in 2001 and the avian flu in 2003.

EU-25 beef and veal consumption recovered rapidly after the BSE crisis and was higher than production in 2003 for the first time in 20 years. It is expected to remain so over the projection period, with production decreasing to around 7.8 mio t by 2011, in line with the structural reduction of dairy herd and the impact of the introduction of the single farm payment. A tight domestic supply and a steady demand are projected to keep beef prices at a relatively high level, attracting more imports entering at full duty, notably from South America.

Pig and poultry production and consumption are expected to keep growing over the medium term, with increased trade flows between the new and old Member States. Sheep and goat production and per capita consumption are projected to decrease in line with past long-term trends and taking into account the possible impact of decoupling of ewe premium.

Overall meat consumption is projected to increase from 87.4 kg/head in 2004 to around 91 kg by the year 2011. Pig meat, with a share of about 50 %, is by far the most preferred meat by EU consumers, followed by poultry, recording a share of around 26 %, which has overtaken beef and veal since 1996.

Milk production in the EU-25 is projected to increase slightly over the medium term, in line with quota increases, to reach the level of 144.9 mio t by 2011. Milk production in the new Member States, which account for around 15 % of total EU production, is projected to remain stable at approximately 22 mio t, as increasing deliveries to dairies - in line with higher quotas- are offset by the reduction in subsistence milk production. Production of butter and SMP in the new Member States would display some short-term growth in response to price increases towards EU levels. However, after the sharp decrease of 2004, EU-25 production of butter and SMP is projected to continue to decrease over the medium-term, as more milk is used for the production of cheese and other high value added dairy products. Cheese production and consumption are expected to keep their sustained growth after the slow down observed in 2002, thanks to the rebound in EU and world economic growth.

These projections result in an overall increase in domestic milk demand in the form of dairy products. As supply remains limited by quotas, butter and SMP exports are projected to shrink and cheese exports to show only a limited increase. Income estimates have been compiled on the basis of these market projections and the financial perspectives for the EU over the period 2004-2011. These medium-term income projections display a rather favourable outlook as the EU-25 agricultural income would grow by 14.2 % between 2003 and 2011 in real terms and per labour unit. This overall gain would however mask marked differences between the EU-15 and the new Member States. Whereas agricultural income in the EU-15 would show a rather modest development with a 5 % growth over the 2003-2011 period, it is foreseen to exhibit a more pronounced and positive trend in the new member States where it would rise steadily by 126.4 % over the projection period.

These developments would be supported by the implementation of the CAP, the integration into the single market and most significantly by the sharp rise in the funds granted to agricultural producers in the new Member States (in the form of direct payments and rural development which aim at facilitating and promoting the restructuring and modernisation of the agricultural sector and the rural areas).

Impact of EU enlargement

The new Member States have joined the EU and the single market since May 2004. Despite some regional difficulties or those of specific sectors, developments since accession show the overwhelmingly positive effect of EU membership on agriculture. In general investments in agriculture have significantly increased alongside income perspectives in most new Member States and induced a small boom in rural areas. Over the last decade, the economies in the new Member States expanded at about double the rate than the economies in the old Member States. This has had positive effects for the agri-food sectors, in particular in the area of consumer demand for meat and dairy products. This trend is expected to continue over the medium term.

During the last decade a high level of integration of markets and policies of the EU-25 was achieved prior to enlargement. On average 65 % of all agricultural exports of the new Member States and 69 % of all imports went to EU-25 destinations over the 1999- 2003 period. Moreover, agricultural policies aligned substantially over the last three years. Therefore, many of the gains in trade already materialised before enlargement. The new Member States contribute in 2004 to about 20 % of the cereals production, 17 % of the oilseed production, 10 % to 17% of the meat production and 15 % of the milk production. The intensity of production and the productivity are relatively low as compared to the old Member States. About 7 % of the factor income in EU-25 agriculture originates from the new Member States. It is expected that the agricultural potential would be only gradually used and structural adjustment would continue.

The market impact of enlargement is very positive for the new Member States. Agricultural production would stabilise or even increases in the area of cereal and meat production. Agricultural markets would benefit from the trade creation effects of the integration into the single market and from the support of the CAP. Agricultural income is expected to significantly increase. In particular, the agricultural sectors of the Czech Republic, Hungary, Lithuania, and Poland would benefit most from the integration as compared to a non-enlargement situation.

Without accession market and income prospects would be less positive. Agricultural income would stagnate and decline alongside with the market prospects in this hypothetical scenario. Particularly vulnerable would be the agricultural sectors of Hungary, Lithuania, and Poland owing mainly to a limited access to EU-25 markets in a non-accession scenario.

World agricultural markets

Short-term developments on world agricultural markets have recently been marked by a stabilisation after the wide price fluctuations of 2003/2004. Over the medium-term, world agricultural markets are projected to be essentially supported by rising food demand driven by an improved macro-economic environment, higher population, urbanisation and changes in dietary patterns.

After the relatively low harvest of 2002 and 2003 the cereal sector is projected to recover its production growth. Widespread economic growth and an expanding livestock sector are projected to combine to set the stage for a strengthening of world demand and maintaining a low stock-to-use ratio. Cereals trade would also expand, particularly in developing economies, driven by rising income, diet diversification and higher demand for livestock products and feeds, allowing for a gradual, albeit moderate, price increase over the medium term. The medium-term prospects for the oilseed sector are expected to be relatively stable. After the high prices of 2003 and the subsequent drop, short term developments are still foreseen to exhibit a slow and gradual supply adjustment in the oilseed sector owing to a combination of policy and macro-economic factors.

Meat markets are projected to be characterised by an expansion in production, consumption and trade with world meat prices showing moderate strength. Prospects for rising meat demand would mainly emerge from a favourable macro-economic environment of sustained income growth, notably in Asia and Latin America. World meat trade would increase and prices remain firm over the medium term as growing consumption is mostly expected to take place in countries that are net importers with limited possibilities to proportionally and competitively increase domestic supply (in quantity and quality). Recovering meat demand and strengthening feed prices would support world meat prices.

The medium-term outlook for the dairy sector is expected to remain dominated by a strong expansion in global demand for dairy products. The latter would reflect not only income growth in many regions of the world, but also changes in consumer preferences towards dairy products (as meat substitutes). Population growth, changing diet towards more “western” style, urbanisation and rising disposable income are forecast to stimulate the consumption of dairy products in many developing countries, in particular in Asia and Latin America, triggering further price rises for dairy products over the medium term.

Poultry

Poultry production has been gradually recovering after the outbreak of avian flu in the Netherlands during spring 2003, which reduced EU production in 2003 by more than 2 %.

The medium-term outlook for poultry production is relatively positive as competitive prices with respect to other meats, strong consumer preference and increased use in food preparations should continue to play in favour of poultry. Per capita consumption is projected to increase from around 23 kg/year in 2003 to about 24.8 kg/year by 2011, with a steeper growth in the new Member States.

The growth rate for both production and consumption are expected to be lower than in the nineties, in line with the slow down observed in most recent years (1999-2004), when production only grew on average by 1.9 % per year as compared to average growth rates of 2.3 % per year over the period 1995-1998.

Poultry imports, which have strongly increased between 1997 and 2001, are projected to decrease sharply in 2004 following the impact of avian flu on South East Asian poultry exporters (e.g. Thailand, which is the second largest poultry exporter to the EU) and of improved custom controls on salted meat. Imports are however expected to resume growing over the longer term, with increased imports of frozen fillets and mainly cooked and processed poultry meat, which are gradually replacing the imports of salted poultry meat.

Extra EU-25 poultry exports are projected to stagnate in line with strong competition on the world markets by low cost producers and unfavourable US$/€ and Brazilian Real/€ exchange rates18. The slow down in extra-EU-25 poultry imports observed since 2002, which has been partially replaced by an increase in intra-EU25 imports, notably from the new to the old Member States, has led to a substantial revision of our previous projections, which envisaged the possibility for the EU to become net importer of poultry meat.

1.3.4. Consumption eggs

In recent years egg production has seen increasing investments in some regions of the EU. Production of consumption eggs peaked in 2001 at 6.35 mio t and then slowly declined during the three following years. Production is expected to resume growing from 2005 onwards to reach 6.2 mio t in 2011. Whereas production growth would be constrained in some old Member States by higher production costs and lower margins, it is expected to gather pace in the new Member States thanks to relatively favourable production conditions related to a good environment for investment, proximity to important consumer markets –currently supplied by a high production cost sector- and a strong domestic market.

Egg consumption would increase over the medium term due to higher income and changes of dietary patterns in some regions of the EU. Consumption would stand around 6.2 mio t in 2011. Imports would remain relatively constant at 30 000 t, while exports would gradually decline to 90 000 t in 2011.

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Source: European Commission - December 2004